Working Paper 66

Economics and Happiness Research: Insights from Austrian and Public Choice

Economics

CHRISTOPHER J. COYNE AND PETER J. BOETTKE*

Abstract

Over the past decade, economists have increasingly focused on happiness research. The main focus has been on understanding the interconnection between economic outcomes and the resulting happiness of economic actors. The work in this area has yielded many implications for policy in a number of areas, including public finance (government expenditure and taxation), welfare policy and labor law. This chapter will critically reexamine the happiness and economics research program and the resulting policy implications through an Austrian/Public Choice lens. It is our contention that the main insights of these schools of thought have been neglected in this area of research.

* Peter J. Boettke is Professor of Economics at George Mason University, Deputy Director of the James M. Buchanan Center for Political Economy, Senior Research Fellow at the Mercatus Center, and Faculty Director of the Mercatus Center’s Global Prosperity Initiative. Christopher J. Coyne is an Assistant Professor of Economics at Hampden-Sydney College in Virginia and an Affiliated Fellow with the Mercatus Center at George Mason University. The authors would like to thank the editors, David Prychitko, Arnold Kling and readers of The Austrian Economists blog for useful comments and suggestions. The financial support of the Mercatus Center is acknowledged. The ideas presented in this research are the authors' and do not represent official positions of the Mercatus Center at George Mason University.

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1. Introduction

Over the past decade economists have increasingly focused on the implications of

happiness, also known as subjective well-being, for economic theory and policy.1 The

focus on happiness can be seen as part of the larger behavioral movement in economics.

To understand the growth and impact of this area of research, consider that the 2002

Nobel Prize in economics was awarded to a psychologist, Daniel Kahneman, "for having

integrated insights from psychological research into economic science, especially

concerning human judgment and decision-making under uncertainty."2 The main focus

of the happiness and economics research has been on understanding the interconnection

between economic outcomes and the resulting happiness of economic actors. The work

in this area has yielded many implications for policy in a number of areas, including

public finance (government expenditure and taxation), welfare policy and labor law.

Our goal in this chapter is to analyze the economics and happiness research program

through the lens of Austrian and Public Choice economics. Specifically, using the tools

provided by these schools of thought, we critically analyze the underlying assumptions

and resulting policy implications of happiness and economics research. It is our

contention that the insights of the Austrian and Public Choice schools have been largely

neglected in this research. Our aim is to begin to fill this gap. We do not assume any

detailed knowledge of Austrian and Public Choice economic on the part of the reader.

Instead, we will briefly provide an overview of their main tenets of these schools of

thought before moving on.

1 Writers in this area use the terms “happiness,” “satisfaction,” and “well-being” interchangeably.2 Source of quote: http://nobelprize.org/economics/laureates/2002/index.html

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The Austrian School of Economics was founded in 1871 with the publication of Carl

Menger’s Principles of Economics. Menger was one of the three co-developers of the

marginalist revolution in economic analysis. For the purposes of our analysis, consider

the following propositions that serve as part of the core of the Austrian school:3

1. Only individuals choose: Man, with his purposes and plans, is the beginning of all

economic analysis. Only individuals make choice, collective entities do not

choose. There are no economic phenomena unconnected to the choices of

individuals. It is a felt uneasiness by the individual at any point in time which

generates action to take steps to remove that uneasiness.

2. Utility and costs are subjective: All economic phenomena are filtered through the

human mind. Objective realities of the world matter, but as far as in the realms of

value and price they only matter in relation to individual perception of them.

3. The competitive market is a process of entrepreneurial discovery: The

entrepreneur is the catalyst of change in the economic process. He is alert to

unrecognized opportunities for mutual gain and exploits those opportunities in

order to earn a profit.

4. Social institutions often are the result of human action, but not of human design:

Many of the important institutions and practices are the result not of direct design,

but the by-product of our striving to achieve another goal. Nobody intends to

3 It should be noted that these propositions do not do justice to the Austrian school in its entirety. For amore detailed exposition of the various aspects of the Austrian school, see Boettke (1994). See Boettke andLeeson (2003) for a discussion of the evolution of modern Austrian economics since 1950.

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create the complex array of exchanges and price signals that constitute a market

economy. Their intention is simply to improve their own lot in life. But their

behavior results in the market system that enables them and millions of others to

pursue their intention of improving their lot in life easier.

5. Dispersed knowledge and unintended consequences: Local knowledge of “time

and place” is dispersed throughout society. No single individual, or group of

individuals, can posses the relevant knowledge to successfully plan the economy.

Given this dispersed knowledge, government agents suffer from a “knowledge

problem.” Interventions in the economy are based on limited information

possessed by the government agents. As such, interventions may generate

unintended consequences that could not have possibly been known prior to the

intervention. These unintended consequences may render the intervention

ineffective or generate a new set of problems.

Public Choice economics emerged in the 1950s out of the study of taxation and publicspending. The founding father of Public Choice, James M. Buchanan, was awarded theNobel Prize in economics in 1986. We will apply the following propositions, generatedfrom this school of thought, in our analysis:4

1. Symmetry of assumptions: Public Choice employs the same principles that

economists use to analyze people’s actions in the private sphere and applies

them to actions in the public sphere. For instance, economists assume that

private actors are motivated by self-interest. Public Choice emphasizes that

economists should apply the same assumptions to public actors. Like private

4 For a more complete analysis of the various aspects of Public Choice theory see, Buchanan and Tullock(1962), Downs (1957) and Gwartney and Wagner (1998).

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actors, public actors pursue their self-interest whether that means catering to

voters, interest groups or bureaucrats.

2. Rational ignorance: Public Choice theory highlights the incentives that voters

face in making their voting decisions. In one of the original contributions to

public choice theory, Anthony Downs (1957) highlighted that the individual

voter is largely ignorant and is rational in remaining in this ignorant state.

The logic behind this claim is that an individual’s vote rarely decides the

outcome of an election. As such, the impact of casting a well-informed vote is

close to, if not, zero. The interaction in democratic politics is characterized by

rationally ignorant voters, specially interested voters and vote-seeking

politicians. Given this, the bias is for politicians to concentrate benefits on the

well-organized, well-informed special interest voters and to disperse the costs

on the unorganized and ill-informed mass of voters.

Taken together, these propositions form the basis of our analysis. We proceed in thefollowing manner. Section 2 provides an overview of the relevant literature in theeconomics and happiness research program. We seek to highlight the majordevelopments as well as the current state of the research. Section 3 provides a criticalanalysis of the existing research through an Austrian/Public Choice lens. Specifically, weemploy the propositions outlined above to critically analyze the core assumptions andresulting policy implications of the research area of economics and happiness. Section 4concludes with the policy implications of our analysis.

2. Happiness and Economics: An Overview of the Research ProgramAlthough psychologists have been studying subjective well-being for decades, the focuson this area by economists is relatively new.5 Over the past decade, some socialscientists have begun to reconsider the strict rationality assumption that underpins

5 For but a few studies and literature reviews in this area by psychologists, see Argyle (1997), Diener et al.(1999) and Kahneman et al. (1999).

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economic theory (see Kahneman 1994). The work done in the area of subjective well-being has been the main means of engaging in this reassessment.

Most consider Richard Easterlin’s study (1974) to be the first case of an economistconsidering the connection between happiness and economic outcomes. Easterlinformulated what became known as the “Easterlin paradox.” In its simplest form, thisparadox states that above a low level of income, economic growth does not improvehuman welfare. The explanation for this paradox was that people consider their level ofwealth not in absolute terms but rather in relative terms. Because they judge their wealthrelative to others, any increase in real income across individuals has little effect.Increases in welfare are not just a matter of everyone’s income increasing. Instead, anindividual’s increase in income must be relatively higher than everyone else’s in order forit to have a real effect on the welfare of the individual in question.

It was not until the 1990s that an increasing number of economists began to ay attentionto the various questions and issues raised by Easterlin’s study. The result has been aburgeoning literature that explores the connection between economics and happiness.Economists working in this area usually define subjective well-being or happiness bygeneral satisfaction with life. The main tool for quantifying well-being is typicallysurveys. These surveys usually ask some variant of the fundamental question: “howhappy are you with your life?” Other questions seek to test if people value relative orabsolute incomes. These questions usually ask some variant of, “Would you rather earn$100,000 in a world where others earn $50,000 or would you rather earn $100,000 in aworld where others earn $200,000?”

Researchers then compare the responses to these questions, to some economic outcome inthe hope of determining what factors influence the overall level of happiness andsatisfaction. For instance, one outcome of this comparison has been the “progressparadox” which is that the overall standard of living has increased for individuals overtime while the level of satisfaction or happiness, over that same period of time, hasremained constant.6 Why, researchers wonder, has the overall level of satisfaction withlife remained constant while standards of living have improved on almost all margins?One explanation, related to the Easterlin paradox is grounded in the way people view orframe their position in society. Indeed much of the economics and happiness literaturefocuses on a “hedonic treadmill” effect where those that are relatively wealthy expectmore.7 As a result, increases in wealth yield disproportionately small increases insatisfaction and happiness than one would expect. Just like a person on a treadmill, thepursuit of happiness requires individuals to continually work harder just to stay in thesame place or, in the context of happiness, to maintain the same baseline level ofsatisfaction.

6 See Easterbrook (2003).7 The “hedonic treadmill effect’ was first identified by Brickman and Campbell (1971).

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A symposium held in the Economic Journal in 1997 was a key factor in raising

awareness within the economics professions of the economics and happiness research

program. The papers in this symposium further explored the theoretical and empirical

implications of well-being and economic theory and performance (Oswald 1997, Frank

1997, Ng 1997). In line with the Easterlin paradox, the studies in the symposium found

that increases in income do increase well-being up to a specific point, but have a

negligible effect after that point.

As the number of surveys, and hence data increased, so too did the number of empirical

studies which attempted to mine this data and use it to further explore the connection

between economics and happiness. For instance, Clark and Oswald (1994) consider how

unemployment impacts subjective well-being. They conclude that experiencing

unemployment is a major source of unhappiness and dissatisfaction. Indeed,

unemployment reduces well-being more than any other single factor considered by the

authors. In other studies, it has been found that general unemployment and inflation,

even if it does not affect the individual being considered, increases unhappiness (see Di

Tella et al. 2001).

Frey and Stutzer (2000, 2002b) analyze the effect of political institutions on happiness.

They conclude that, “the extent of possibilities for direct democratic participation exerts a

statistically significant, robust and sizeable effect on happiness over and above the

demographic and economic determinants normally taken into account” (2002a: 12). The

main implication is that government decentralization is a key mechanism for increasing

political participation and hence subjective well-being.

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More recently, research by Kahneman et al. (2004a) analyzes the allocation of time

during the period of a day and attempts to classify events and activities by the satisfaction

that they yield. The ranking of satisfaction associated with various events and activities

in turn generates an “enjoyment scale.” The approach, termed the “Day Reconstruction

Method (DRM),” requires participants to recall memories from the previous day by

keeping a personal diary. Participants are asked to think of their day as a series of frames

or episodes in a film. Researchers ask participants to answer specific questions about

each frame or episode with the hopes of determining the satisfaction associated with each

event or activity.

The authors of the DRM study found that spending relaxing time with friends, having

lunch with co-workers, watching television and cooking all bring satisfaction (i.e., are all

toward the high end of the enjoyment scale). In contrast, being in the presence of one’s

boss, working and commuting all brought dissatisfaction (i.e., are at the lower end of the

enjoyment scale. The researchers also used the resulting enjoyment scale to compare

various activities against each other. For instance, they determined that respondents that

slept well enjoyed as much satisfaction as those that watched television while those that

slept poorly enjoyed the same dissatisfaction as those who commute.

The studies discussed above serve only to highlight the research being done in this area.

One should expect this area of research to continue to grow over the coming years as

techniques for quantifying satisfaction are further developed. For instance Kahneman,

along with other researchers, hopes to establish a U.S. "National Well-Being Account,”

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which would be a national index akin to the Gross Domestic Product (see Kahneman et

al. 2004b). Instead of providing an aggregate measure of economic performance and

well-being, the National Well-Being Account would provide a similar measure of well-

being and satisfaction.

3. Austrian and Public Choice InsightsIn this section we wish to raise some critical issues with the subjective well-being

research program as well as some of the policy conclusions that have been generated

from happiness and economics research. Specifically, it is our contention that the

insights of the Austrian and Public Choice schools of economic thought have been

neglected in happiness and economics research. The core tenets of these schools of

thought offer key insights into both the research program and resulting policy

conclusions.

3.1 Aggregation and subjectivity of happiness

One key issue is that it is not clear that well-being can be aggregated into a unified

category that survey questions require. While individuals may know what makes them

happy, expressing this in terms of a fixed category provided on a survey will by no means

actually capture the notion of happiness. For instance, asking an individual if they are

“more or less” happy than they were in the pass does not capture the essence of what

generates subjective well-being. However, such clear cut and simple categories are

necessary for statistical manipulation. In short it would appear that the surveys, which

are the key source of data on well-being, trade off understanding the richness of what

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actually generates well-being for the ability of researches to utilize the data in statistical

tests.

Another issue relates to the very notion of well-being, happiness or satisfaction. It is

critical to realize that the notion of happiness is not static across individuals at one

specific point in time. Each individual has a subjective view of what happiness entails.8

Not only does happiness vary across individuals at a point in time, but also what

constitutes well-being for an individual will change over time, as new opportunities,

which were not part of the feasibility set in prior periods, become available. As Arnold

Kling (2004) notes, “People a few hundred years ago had no idea what it was like to live

with indoor plumbing, abundant food, and antibiotics.” Given that respondents in the

current period have never experienced life without these tangible goods, how can one

meaningfully compare survey responses across time periods?

Even if survey responses did accurately capture the essence of well-being, it is unclear

that the responses can successfully be compared to others in any meaningful way. Recall

from the Introduction that the Austrian school emphasizes the subjective nature of value.

Economic phenomena are filtered through the human mind and only have meaning in

terms of the individual’s perception. Because individual values are subjective, we cannot

meaningfully compare them across individuals or even across time for the same

individual in any objective way. Even though we may be able to compare the relative

incomes of two individuals, we cannot say anything meaningful about their relative

8 We recognize that happiness may have some intersubjective dimension. But is unclear that we can fullyunderstand our capture this dimension in a way that allows us to make meaningful comparison.

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satisfaction or well-being that those individuals derive from that well-being. Indeed, all

economics can meaningfully say is that the action of individual demonstrates their

preference for pursuing that course of action. As Rothbard writes:

The concept of demonstrated preference is simply this: that actual choice reveals,

or demonstrates, a man’s preferences; that is, that his preferences are deducible

from what he has chosen in action….This concept of preferences, rooted in real

choices, forms the keystone of the logical structure of economic analysis… (212).

Demonstrated preference limits what the economist can say about the preferences of the

individual actor. Consulting the individual’s verbal or written survey response does not

establish true preferences because there is no way to decipher if that actually what the

individual values. In contrast observing an individual who engages in concrete action

illustrates to the observer that the individual undertaking the action expects, ex ante, to be

made better off through that course of action. Whether the action has the desired effect is

another question.

In sum, it is unclear that surveys can accurately capture the well-being of individuals. In

the first place, they often provide fixed categories that individuals must choose from.

This attempt at aggregation fails to capture the essence of what actually generates well-

being. In other words, we have no reason to believe that the survey method can capture

the relevant notion of happiness. Moreover, even if surveys could accurately capture

well-being, it is not possible to compare relative well-being across individuals. Well-

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being is a subjective value that simply cannot be objectively measured or compared

across individuals in any meaningful sense.9

The issues raised above pose major problems for the many studies that attempt to

compare satisfaction survey responses across decades. For instance, in The Progress

Paradox, Gregg Easterbrook (2003) attempts to explain why American living standards

have risen drastically over the past several decades while happiness, as measured by

survey data, have not. Likewise, Robert Frank relies on survey data across time in his

Luxury Fever (2000).10 Similar to Easterbrook, Frank attempts to explain how well-being

has failed to increase at the same rate as other economic indicators such as per capita

income and productivity.

At the core of Frank’s argument is that individuals, in seeking relative status, place too

much focus on tangible goods (i.e., house size, cars, vacations, etc.) while neglecting

intangible goods (i.e., commuting time, family time, etc.). It is the (over)emphasis on

accumulating tangible goods, while underemphasizing the importance of intangible

goods, that leads to the underlying paradox. The main implication is that public policy

should be oriented such that it raises the relative cost of obtaining tangible goods. With

the relatively higher cost of tangible goods, individuals will tend to increase their

consumption of intangible goods.11

9 There is far from unanimous agreement on this point. See for instance Ng (1996, 1997). Ng (1996)develops an interpersonally comparable measure of happiness based on the notion of just perceivableincrements.10 See especially Chapters 5 and 6.11 Along similar lines, Layard (2005) concludes that above some minimum income level, relative income isa better indicator of an individual’s reported well-being as compared to absolute income level. As such,

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To generalize the issues with these studies, depending on the time and the individuals

selected, the very notion of happiness will be substantially different. In addition to each

person possessing a subjective view of what they consider to be happiness, they also have

a subjective perception of what others experienced in the past and what others will

experience in the future. So when researchers ask respondents if their parents were better

off or if their children will be better off, this is not some objective measure but a

subjective perception of the past and future. As such, comparing survey results over time

does not seem to generate any meaningful insights. While much of the economics and

happiness literature focuses on framing issue – as evidenced by the emphasis on the

hedonic treadmill effect whereby those that are relatively wealthy expect more – to

explain differences in well being, they neglect the fact that such framing issues will cause

individual respondents to have varying understandings of what the notion of happiness

entails. As the circumstances of individuals change, so too does their understanding of

the notion of happiness and well-being. As Kling (2004) highlights, individuals may

report on their happiness relative to the near-term past, not over the long-term past. What

this means is that a respondent may compare their present situation to that experienced

more recently – past weeks, months or years – instead of what they experienced in the

long-term past – decades.

3.2 Can government deliver happiness?

every time an individual experiences a rise in relative income they make others unhappy. Layard concludesthat this negative externality should be corrected through a Pigouvian tax.

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Happiness and economics research generates many significant policy implications. Much

of the literature concludes that if the goal is to increase well-being, there is a large role

for government intervention to bring about the desired end. For instance, some conclude

that there is a major role for government redistribution between various income groups to

close the relative gap and increase well-being. Because much of the happiness and

economics research concludes that individuals view their situation relative to others, one

could conclude that tax policy can play a key role in ending this competition between

income groups. Likewise, following Robert Frank’s (2000) study discussed in the above

subsection, one could conclude that there is a role for government to play in increasing

the relative cost of tangible goods through taxation. Doing so would make intangible

goods relatively attractive. In this subsection we wish to argue that there are good

reasons to conclude that government cannot effectively generate interventions that

achieve the desired end of increasing well-being and satisfaction.

One major issue faced by government agents is the knowledge problem. As F.A. Hayek

(1945) emphasized, the economic problem facing society is not one of simply allocating

given resources. Instead, the key issue is how to best secure and utilize the unique

knowledge of “time and place” that is dispersed throughout society.12 At any point in

time an individual can only possess a small piece of the knowledge that is present in

society. Hayek concluded that a market economy, with an unhampered price system, was

the best means of coordinating economic activities. Given Hayek’s insight, one realizes

12 On the important distinction between information and knowledge, see Boettke (2002). Austriansemphasize that knowledge is ever changing and is multifaceted, while information is something fixed. Inother words, information is the stock of the existing known, while knowledge is the flow of new and everexpanding areas of the known. Austrians emphasize not just the proficient use of existing information, butalso the discovery and use of new knowledge that comes into being only because of the context in whichactors find themselves acting.

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that government interventions are based only on the limited knowledge of the

government agent. As a result, it is unclear that specific policies can be designed that

will have the desired effect. Indeed, interventions will generate unintended consequences

that government agents, given their limited knowledge, could not have possibly

anticipated.

For instance, in theory tax policy may be effective in reducing the relative income gap

between incomes groups or in raising the relative price of tangible goods. But that

policy, once implemented, may also have the unintended consequence of increasing tax

evasion as well. Similarly, such a policy could lead individuals to seek alternative means

of housing income and wealth to avoid the new tax. At the extreme the unintended

consequences can render the original policy completely ineffective or cause more harm

than good.

A related issue is that even if an ideal policy to increase happiness can be designed, it is

unclear that it could be effectively implemented. As discussed earlier, rationally ignorant

voters, vote-maximizing politicians and special-interest groups characterize democratic

politics. In order to maximize their vote total, politicians will cater to the well organized.

The result is a concentration of benefits on the well organized and a dispersion of the

costs on the rationally ignorant, unorganized. This same logic applies to legislation

aimed at increasing well-being and satisfaction. Such policies will be influenced by well

organized special interests and once enacted will look drastically different than they did

in their original form. As such, even if legislation can effectively be designed it is

unclear that it can be implemented. Only a benevolent dictator would have the incentive

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to maximize society’s happiness (see Brennan and Buchanan 1985). Indeed, even if

government is able to determine the “social happiness function,” attempts to maximize it

through government policy would fall prey to the same incentive issues faced by

government attempts to maximize social welfare (Frey and Stutzer 2002c: 472).

Let us assume the best-case scenario. Assume that a social happiness function can

actually be established and that the proper incentives are in place for government agents

to maximize well-being and satisfaction. Even under this favorable scenario it is still

unclear that the policies implemented will be effective. Recall that happiness is not a

static concept. Indeed, subjective well-being will vary over time for each individual. As

such, a policy implemented in Period X will be ineffective in future periods when the

subjective notion of well-being changes.

As Milton Friedman pointed out a long time ago, the dynamics of change associated with

the passage of time presents a timing problem for public policy. The reason this poses a

problem is because a long and variable time lag exists between:

1. The need of action and the recognition of that need

2. The recognition of a problem and the design and implementation of a policy

response; and

3. The implementation of the policy and the effect of the policy (Friedman 1953:

145).13

13 It is because of these lags that Friedman argues that discretionary public policy will often bedestabilizing. For this reason, he argued the case for general rules rather than discretionary policy.

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Given these lags, it is unclear that even if an effective policy can be designed and

implemented that the timing will be such that it will have the desired effects.

Before moving on we wish to raise one final issue regarding government redistribution

aimed at maximizing well-being. In addition to the issues raised above, it is critical to

realize that the act of redistribution is not neutral. In other words, redistribution has real

effects that distort the very process that generates the initial wealth. As F.A. Hayek

(1976) discussed, questions of distribution are often misplaced in political economy

because they assume a fixed pie that is being divided up according to rules of distribution

that are judged as fair or not. Hayek’s objection was not that fair divisions are not

desirable. His criticism was that the rules of fair division are not neutral with regard to

the incentives and information associated with production. The size of the pie being

divided is a function of the way we divide the pie. Interventions aimed at redistribution

shift the incentives and information faced by those engaged in the process that produces

the allocation of goods being redistributed.14

In sum, there are numerous forces at work that make it extremely difficult, if not

impossible, for government to effectively intervene to increase well-being. The first

issue is whether happiness can be aggregated across society to obtain a social happiness

function. Even if that can be done, government agents suffer from a fundamental

knowledge problem that will reduce the effectiveness of policy in addition to generating

unintended consequences. Furthermore, the actual process of policy implementation

14 For further discussion on the how government interventions impact the incentives and informationthroughout the economy, see Ikeda (1997).

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suffers from special-interest group manipulation and variable time lags which may very

well render policy ineffective. Finally, government attempts to redistribute wealth are

not neutral with respect to information and incentives. These interventions distort the

incentives and information that economics agents act upon to generate economic

outcomes. As such the rules of redistribution will influence these outcomes which in turn

will impact the overall distribution of wealth.

4. Policy ImplicationsOur analysis has critically considered the happiness and economics research program

through an Austrian/Public Choice lens. One of our core contentions is that the notion of

happiness is subjective in nature. The phrase, “one man’s garbage is another man’s

treasure,” neatly captures the essence of our argument in this regard. There are many

different notions of happiness that vary across individuals and across time. These

different notions of happiness will lead different people to pursue different ends.

Economists often focus on the importance of wealth as an indicator of overall well-being.

The materialism of economics has been criticized as narrowly focusing on only one

aspect of human wants and desires. Critics argue that there are many immaterial goods

that actors desire in addition to tangible, material goods. However, such criticism

overlooks the fact that viewing well-being in terms of wealth is grounded in the

maximization of individual happiness and satisfaction. Of course we fully realize that

one cannot consume economic growth rates. Increases in growth rates and wealth are

desirable precisely because they deliver other things that allow individuals to pursue ends

that bring them satisfaction. As Mises indicated,

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The immense majority strives after a greater and better supply of food, clothes, homes, and other material amenities. In calling arise in the masses' standard of living progress and improvement, economists do not espouse a mean materialism. They simplyestablish the fact that people are motivated by the urge to improve the material conditions of their existence. They judge policiesfrom the point of view of the aims men want to attain. He who disdains the fall in infant mortality and the gradual disappearanceof famines and plagues may cast the first stone upon the materialism of economists (1949: 193).

Most are familiar with the saying, “Money can’t buy happiness.” Indeed wealth does notbuy happiness, but it does allow individuals to lead a flourishing human life. Whatexactly does a flourishing human life entail? Because the very notion of happiness issubjective and constantly changing, it is our contention that a flourishing human life isone where the individual has the freedom to discover and pursue whatever it is thatmaximizes well-being. For some a flourishing life will be characterized by a workaholiclifestyle, for others it will consist of a life dedicated to philanthropy and charity.

The important point is that across the wide range of lifestyle alternatives available toindividuals, wealth makes the pursuit of happiness possible. This is due to the fact thatrelatively lower levels of disease, sickness and infant mortality and relatively higherlevels of life expectancy, literacy and leisure characterize wealthier societies. Individualsin relatively wealthy societies are able to pursue ends that being them happiness andsatisfaction precisely because they do not have to worry about the source of their nextmeal or where they will find shelter. In other words, individuals in relatively wealthysocieties can afford to pursue ends that yield personal well-being. Individuals can engagein leisurely activities with family and friends or participate in various associations, clubsand political associations because they have reached a level of wealth where basicconcerns such as food, shelter, education and health are non-issues. In short, increasingwealth expands the feasibility set of activities available to individuals that allows them toachieve increasing levels of happiness and satisfaction.

The main implication of our analysis is that happiness is not suitable as a guidepost for

public policy. In other words, public policy should not seek to maximize social

happiness. Instead public policy should focus on allowing actors to maximize their

individual well-being. Given that happiness is a function of subjective individual

preferences, public policy cannot focus on intervening to deliver happiness to individuals.

Instead, it is our contention that public policy should focus on establishing the conditions

of economic and social autonomy. Only when these conditions of autonomy are in place

will individuals be able to discover and pursue whatever their notion of happiness may

entail.

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To be clear, we are not claiming that prosperity will lead to the removal of all uneasiness.

Indeed, economic autonomy and wealth are not a panacea. Instead, increasing levels of

wealth provides the means through which individuals can purse the ends that they feel

will maximize their well-being. This leads to another important point related to those

who claim there is a paradox between increasing wealth and stable levels of reported

happiness. This point is that perhaps there is no paradox at all. Most people would agree

that money and material things are not the equivalent of happiness. Given this, why

would we expect to see a correlation between an increase in progress and an increase in

happiness? As David Miller indicates,

We judge any economy too harshly if we ask how much it contributes to innerhappiness. The case for markets is that they are an effective means of supplyingmany goods and services to consumers. Some consumers will find that what theybuy fails to live up to their expectations, but the worst that can be said aboutmarkets is that they reinforce, rather than challenge, the psychology that bringsabout this result (1989: 42).15

It is not clear that the claim has ever been that prosperity will lead to the removal of all

uneasiness. It is also unclear that public policy can achieve this. Instead of trying to

increase well-being through direct interventions, policy should aim to create an

institutional environment – political, legal and economic – that allows individuals to

remove as much uneasiness as possible. Historically, the economic system that has been

the most successful at maximizing the wealth of individuals is laissez-faire capitalism.16

15 We are grateful to David Prychitko for bringing this quote to our attention.16 Research indicates that countries with policies and institutions consistent with economic freedom growmore rapidly and obtain higher levels of wealth (see Gwartney, Holcombe and Lawson 2004).

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